Environmental protection and compensation cost for the yali hydropower plant in vietnam

Environmental Protection and Compensation Costs for
the Yali Hydropower Plant in Vietnam

Nguyen Van Hanh, Nguyen Van Song

November, 2002

Comments should be sent to: Nguyen Van Hanh. 53 Tho Nhuom, Hanoi, Vietnam.


Email: or
______________________________________________________________________

EEPSEA was established in May 1993 to support research and training in
environmental and resource economics. Its objective is to enhance local capacity to
undertake the economic analysis of environmental problems and policies. It uses a
networking approach, involving courses, meetings, technical support, and access to
literature and opportunities for comparative research. Member countries are Thailand,
Malaysia, Indonesia, the Philippines, Vietnam, Cambodia, Lao PDR, China, Papua New
Guinea and Sri Lanka.
EEPSEA is supported by the International Development Research Center (IDRC); the
Danish Ministry of Foreign Affairs (DANIDA); the Swedish International Development
Cooperation Agency (Sida); the Canadian International Development Agency (CIDA);
and the MacArthur Foundation.
EEPSEA publications are produced by Corpcom Services Sdn. Bhd. in association with
the Montfort Boys Town, Malaysia. This program provides vocational training to boys
from low-income families and home-based work to mothers. EEPSEA publications are
also available online at http: //www.eepsea.org.


ACKNOWLEDGEMENTS

The present study was generously financed by the Economy and Environment Program
for Southeast Asia (EEPSEA). We are grateful to EEPSEA and its staff for the training
and funding of this study.
We were fortunate to have a number of careful, erudite and experienced EEPSEA
reviewers who read the entire draft reports compiled at different stages of the study.
We are pleased to acknowledge the valuable assistance and encouragement of Dr. David
Glover. We also benefited enormously from his advice, criticism, comments and
suggestions on the conceptual and methodological approach as well as on the empirical
presentation in each chapter. In addition, our thanks go to Dr. Herminia Francisco who
critiqued and revised the proposal and the interim report of the present study.
We are grateful to Dr. David James for his cheerful and patient processing and revising
of all draft reports of this study. His useful and important comments, corrections and
suggestions for improving the draft reports are greatly appreciated.
We are also thankful for the helpful course conducted by EEPSEA Biannual Workshops
in the year 2001 and 2002 where environmental economics and related knowledge and
experiences were disseminated.
Our thanks also go to the Mekong Secretariat in Vietnam, the survey team and local
authorities who helped to collect information, documents and data related to the
environmental impacts of Yali Hydropower Plant.
Finally, we deeply appreciate the recognition of EEPSEA that research to value
environmental costs of Yali Hydropower Plant and to incorporate them into the
financial analysis of the plant is vital to an improved understanding of its integrated
viability from the economic, financial and environmental aspects.


TABLE OF CONTENTS
Executive Summary

1

1.0

Introduction

2

1.1

Background and Rationale of the Study

2

1.2

Objectives

3

1.3

Methodology

4

2.0

3.0
4.0

Valuation of Environmental Protection and Compensation Costs

5

2.1

Meteorology

5

2.2

Hydrology

5

2.3

Water Supply

5

2.4

Erosion and Sedimentation

6

2.5

Land Use

6

2.6

Forestry

7

2.7

Watershed Management

8

2.8

Fauna

8

2.9

Water Quality, Aquatic Life and Fisheries

8

2.10 Reservoir-induced Seismicity

9

2.11 Public Health and Water-borne Diseases

9

2.12 Compensation and Resettlement

10

2.13 Other Effects

11

2.14 Results

11

Net Present Value and Electricity Price With and Without
Environmental Costs

12

Policy Recommendations

14

References

16

Appendices
Appendix 1. YHPP Environmental Costs by Years and by Environmental Factors

17

Appendix 2. Net Present Value (NPV) for Two Assumptions: With and Without
Incorporating the Environmental Costs of the Plant into Its Direct Costs

19


LIST OF TABLES
Table 1.

Environmental Costs of Yali Hydropower Plant

12

Table 2.

Effects of Incorporating Environmental Costs on YHPP’s Net Present
Value and Electricity Price

13



ENVIRONMENTAL PROTECTION AND COMPENSATION COSTS FOR THE
YALI HYDROPOWER PLANT IN VIETNAM

Nguyen Van Hanh, Nguyen Van Song, Do Van Duc and Tran Van Duc

EXECUTIVE SUMMARY
The Yali Hydropower Plant (YHPP) is located on the Sesan River in the West
Highlands of Vietnam’s Central region. It has an installed capacity of 720 MW and an
energy output of 3,600 GWh per annum. Construction of the plant began in 1993 and
was completed in 2000. Inundation of the reservoir led to the flooding of 1,933 ha
agriculture-based land and the relocation of 1,149 households living in 26 villages.
In published environmental and financial studies of YHPP, the original financial
analysis ignored a wide range of environmental costs in determining the most important
indices of financial viability namely, its net present value and electricity price. As a
result, the full cost of hydropower generation scheme is understated. Thus the calculated
price charged for electricity generated by the plant did not cover the full cost of
electricity production, and the estimated net present value of the plant did not reflect its
real value.
The purpose of this study is to estimate the monetary value of the main environmental
protection and compensation costs of YHPP and to incorporate them into the financial
viability indices of the plant, namely its net present value and electricity price.
The study was carried out through the following steps:
Analyze environmental data from published environmental impact assessments
YHPP and undertake additional on-site surveys where necessary.

of

Estimate the costs of preventing and mitigating environmental impacts and those of
compensation for the relocation and resettlement of residents affected by the plant.
Incorporate these costs into the main indices of financial viability of the plant, namely
its net present value and electricity price.
Recommend polices that would apply the principles of full-cost pricing and user pays
for environmental costs in pricing the electricity generated by YHPP. This should

ensure sufficient revenue to cover all costs of electricity generation, including
environmental protection and compensation costs.
The central assumption of the study is that the ecosystem and its inhabitants should be
restored to the state of environment and health that they enjoyed before the dam was
constructed. The present study has not attempted a cost-benefit analysis of any of the
1


mitigation measures to see whether or not the benefits the people and ecosystems would
receive are large enough to justify the cost of mitigation.
It was found that if the electricity price is kept at its original level of 5.2 US cents/kWh
to cover direct costs only, the net present value of the plant would be reduced to about
27% by incorporating environmental costs. Alternatively, the electricity price would
have to be increased to 5.68 US cents/kWh in order to cover the full costs of YHPP and
to maintain the original net present value.
The main policy recommendations are:
Government regulations should require that the financial analysis and appraisal of all
future electricity sources include the full cost of these schemes, including not only
direct costs but also environmental costs related to preventing or mitigating the
environmental impact caused by them.
The electricity pricing policy applied to all future electric power sources should be
based on the principles of full cost pricing and user pays for environmental costs caused
by them. This should be applied to all fuels and energy sources, not only hydroelectricity. Among other things, this will encourage electricity consumers to implement
energy saving measures and to eradicate the current subsidized electricity pricing
mechanism of the electricity sector.
An appropriate financial mechanism should be established to allocate the revenue from
full cost electricity pricing to a fund to cover the environmental protection and
compensation costs.
1.0
1.1

INTRODUCTION

Background and Rationale of the Study

The Yali Hydropower Plant (YHPP) ranks second among the electricity sources of
Vietnamese unified national electricity system. This is because of its great electricity
potential, high financial viability and favorable plant location for cheap electricity in
supplying the central and southern part of Vietnam and for ensuring the stability of
running the whole electricity network of the country.
The YHPP is located on Sesan River in the western highland of Central Vietnam where
the Thuong ethnic minority tribes live. These tribes have low incomes and special
customs and habits. The plant has an installed capacity of 720 MW and an electricity
generation of 3,600 GWh per annum. This is about 10 % of the total electricity
production forecasts for the country in the year 2010 (Institute of Energy 1998). The
plant construction began in the year 1993 and was completed in April 2002 with an
earth fill dam of 12,457,000 m3 embankment volume and a reservoir of 64.8 km2
surface and 1,037 Mm3 gross capacities. This caused the inundation of 26 villages, the
relocation of 1,149 households (with 5,384 inhabitants) and the loss of about 6,000 ha
of agriculture and forestry-based land.

2


The project area is sited in the western highlands of Central Vietnam at altitudes of 350
m to 1,700 m. The hydropower plant is constructed just at Yali Falls on the Sesan River.
After completing the dam embankment, the Yali Falls with their scenic splendors were
destroyed.
The dam is earth fill, with a crest elevation of 520 m, upstream slope of 1:5 and
downstream slope of 1:2. The spillway has an overflow crest elevation of 500m. Its

peak outflow discharge at 1,000 years probable flood is 10,500 m3/sec and maximum
reservoir water level is 527.2 m. The catchment area is 7,445 km2 .The average annual
rainfall is 2,200 mm per annum and runoff is 8,515 million m3 per annum. The total
construction cost was USD 614.78 million. The plant lifespan of YHPP is forecasted to
be 48 years (1993 - 2040).
In order to meet plant-related environmental concerns, the environmental impacts of the
plant was fully assessed qualitatively and partially estimated quantitatively in previous
environmental studies by the Mekong Secretariat and Ministry of Energy. However,
these studies ignored a wide range of environmental protection and compensation costs.
Because these were not incorporated into the direct costs of the plant, the full cost of
hydropower production was understated.
This study provides a comprehensive assessment of the main environmental protection
and compensation costs of YHPP and incorporates them into its net present value
(NPV) and electricity price (p).
This study did not attempt a cost-benefit analysis of any of the mitigation measures to
see whether it is of benefit to the people and whether the ecosystems are large enough to
justify the costs of these measures. Our assumption is simply that the ecosystems should
be returned to an approximation of its pre-dam state. Failing that, compensation should
be provided to the people who are directly affected.
1.2

Objectives

1.

To identify and value the environmental costs of YHPP.

To determine the full cost of YHPP by incorporating environmental costs into the direct
costs of its hydropower production.
To apply the principles of full cost electricity pricing and electricity user pays for YHPP

environmental costs and to estimate the financial effects of applying these principles on
YHPP’s net present value and electricity price.
To recommend policies and to apply these principles to electricity generation in
Vietnam.

3


1.3

Methodology

Information was first collected from published sources about the physical impacts of
YHPP (Mekong Secretariat and Ministry of Energy 1992; PIDC 1 1994; Francisco and
Glover 1999). In particular, it drew on the impact assessments in the original
Environmental and Financial Studies by the Mekong Secretariat and the Vietnamese
Ministry of Energy.
This was supplemented by on-site surveys in a few cases. Twelve impacts were
assessed: meteorology, hydrology, water supply, erosion and sedimentation, land-use,
forestry, watershed management, fauna, water quality and aquatic life, induced
seismicity, public health, compensation and resettlement. Monetary values for each
were estimated using procedures described in 2.0. Valuation of Environmental
Protection and Compensation Costs
We then incorporated the monetized environmental costs into the direct costs of
hydropower production of the plant in order to determine its full cost
Cft = Cdt + Cet
in which:
Cft

Full cost in year t of the plant

Direct cost in year t of the plant that consists of investment cost and operation –
Cdt
management - amortization cost
Environmental cost in year t of the plant that consists of its environmental
Cet
protection and compensation cost
The Cdt of YHPP was calculated in the original financial study for the plant, while the
Cet was valued by this study, considering the twelve environmental factors as follows:
12

C et = ∑ C ekt
k =1

in which:
Cekt

Environmental cost related to the environmental factor k in year t

We then determined the net present value (NPV) of the plant using two assumptions:
with and without incorporating the environmental costs into the direct costs of the plant
on condition that its direct cost-based price p is kept at the original level of 5.2 US
cents/kWh (this electricity price is formally defined by electricity authorities for
YHPP).
- Without incorporated YHPP environmental costs:
N

NPVd = ∑ ( pQ − C dt )(1 + i ) −t ;
t =1

4


- With incorporated YHPP environmental costs:
N

NPV f = ∑ ( pQ − C dt − Cet )(1 + i ) −t ;
t =1

in which:
p

Direct cost - based electricity price

Q

Annual electricity quantity generated by the plant

N

Plant life of 48 years (1993 - 2040)

i
Standardized discount rates for the Vietnamese electricity sector (8%;10%;
12%)
We also explored a scenario in which the NPV was kept at its original value, while the
electricity price was increased to a level that would allow incorporation of
environmental costs. The full cost-based electricity price p' is determined by solving the
following equation:
N

∑ (pQ − C
t =1

dt

)(1 + i )

−t

N

= ∑ ( p ' Q − C dt − C et )(1 + i) − t
t =1

Finally, we drew from this analysis some recommendations for full-cost electricity
pricing for YHPP and for Vietnam in general.

2.0

2.1

VALUATION OF ENVIRONMENTAL PROTECTION AND
COMPENSATION COSTS

Meteorology

There is a negligible impact on the climate of the catchment area through the increase in
local humidity. The only mitigation measure required is monitoring equipment valued at
USD 2,000 and disbursed entirely in 1993.

2.2

Hydrology

No significant adverse environmental effects are identified and no mitigation measures
are required. However, existing monitoring stations need to be expanded and
supplemented with new stations to improve flood warning and water level recording.
This equipment would cost USD 350,455 disbursed over five years from 1993 to 1997,
(i.e. USD 350,445 = 5 × USD 71,091).

2.3

Water Supply

There is no significant harmful effect on water supplies either for domestic consumption
or for agriculture in the catchments, so no mitigation measures are required.

5


However, the future growth of demand for irrigation water in the catchments will reduce
runoff, and thus the YHPP’s energy generation will be reduced by about 2% per annum.
This effect is assessed through estimating the foregone revenue caused by the reduction
of electricity generation:
5.2 US cents /kWh × 2% × 2,726 GWh/year = USD 2,862,546/year.
This environmental cost is allocated over the period from 2001 (when all of four
electricity generation units of the plant are functioning) to 2040, the last year of the
plant’s lifespan.

2.4

Erosion and Sedimentation

Estimated reservoir sedimentation is about 2.0 million m3/year, half of which can be
expected to penetrate deep into the reservoir's dead storage. This can lead to the
reduction in lifespan storage of the reservoir of about 1% per year. Delta formation and
flooding of Kontum town by an additional backwater effect could also occur. None of
these three effects would have drastic consequences. Some reservoir bank erosion could
occur at its west bank and near the dam. Mitigation of erosion and sedimentation can be
accomplished through the measures described in Section 2.7, such as protecting the
reservoir's shoreline by a forest belt and limiting agricultural activities and habitation.
In this section, we include a cost of USD 1,000/year as the cost of monitoring these
measures.

2.5

Land Use

Due to the construction of YHPP, a change in land use in the reservoir area occurred.
The total area permanently and seasonally flooded by the reservoir is 6,400 ha, of which
1,700 ha of permanently flooded area and 4,700 ha of seasonally flooded area have
considerable potential for agricultural production and forestry. This total flooded area of
6,400 ha comprises 1,200 ha of agricultural land, 700 ha of forestry land, 3,600 ha of
uncultivated land and 900 ha of other land.
The loss of agricultural production value by flooding is estimated at USD 166,273 per
annum. This loss is allocated annually from 2001 to 2040. The cost of a study on the
irrigation potential of a semi-impounded area is estimated at about USD 7,688. The cost
of realizing a pilot scheme on soil conservation and sedentarization of agriculture is
estimated at USD 90,000.

The cost of monitoring the land use status is estimated at USD 655 per annum.
The total costs of the above USD 7,688 and USD 90,000 is as allocated for the period
from 1993 to 2000, i.e. the land-use related annual environmental cost, is
 7,688 + 90,000

+ 655  = 12,866 USD/year.

8


In addition, two costs possibly attributed to land use change have been assessed
elsewhere. Compensation for the loss of home-gardens flooded by reservoir is estimated
in the discussion in Section 2.12 (Compensation and Resettlement) as a component of
the total compensation for the relocated population. Compensation for forestry land
6


flooded by reservoir is estimated and discussed in Section 2.7 (Watershed
Management).

2.6

Forestry

During the construction phase of the plant, after completing the dam embankment in the
project area, a forestry area of 3,944 ha was lost due to the reservoir's flooding. This
flooded forest area includes 114 ha of high value forests, 161 ha of medium value
bamboo forests and 3,669 ha of degraded mixed forests.
After building the powerhouse, access roads, and quarry sites etc., in the downstream
area, 150 ha of high value forests were destroyed. The following losses are significant:

Loss of annual timber extraction from the flooded high and medium value forest area of
425 ha (114 ha + 161 ha + 150 ha = 425 ha) (Bann 1998)
Loss of annual timber extraction from the flooded degraded forest area of 3,669 ha
(Bann 1998)
Loss of local households’ income from exploitation of non-timber forest products of
flooded forest areas.
Costs of forming protection forests by replanting degraded forests and protection
against fire and illegal logging. These forestry-related activities were from an
independent program for forestry development in western highlands’ areas in order to
compensate for the forest areas flooded by the YHPP reservoir.
The forestry - related environmental costs are estimated on the basis of the following
data:
The annual timber extraction figure per hectare of rich and medium forest in Gia Lai
and Kontum provinces is estimated at 54.63 m3/ha/year (Mekong Secretariat and
Ministry of Energy 1992 Vol. II).
The annual timber extraction figure per hectare of degraded (poor) forests in Gia Lai
and Kontum provinces is estimated at 8-12 m3/ha/year. These are estimated from
interviews with senior forestry specialists of Gia Lai and Kontum provinces.
The average annual income from exploiting non-timber forest products by local
households is estimated at USD 155/household/year. These are estimated from
household surveys in similar parts of Vietnam (Mekong Secretariat and Ministry of
Energy 1992; Francisco and Glover 1999).
The costs of the program of afforestation, reforestation, re-planting and forest protection
are estimated by the environmental management and monitoring plan for YHPP project
(Mekong Secretariat and Ministry of Energy 1992 Vol. IV).
The average unit sale price of timber in Gia Lai and Kontum provinces is USD 17.05
/m3 (Mekong Secretariat and Ministry of Energy 1992 Vol. V: (Annex 7 – Table 7-4)
Estimated monetary values for the area in question are as follows:

7

1.

Loss of annual timber extraction from flooded forest area of 425 ha:
(114 ha + 161 ha + 150 ha = 425 ha).
USD 396,115/year

2.

Loss of annual timber extraction from flooded degraded forest areas of 3,669 ha:
USD 618,255/year

3.

Loss of local households’ income from exploiting non-timber forest products:
USD 98,739/year

4.
Costs of the forestry development program in areas located near YHPP in order
to compensate for the forest areas flooded by the reservoir of the plant:
a. During eight years (1993-2000) of construction phase:

USD 177,024 /year

b. During the first 10 years (2001-2010) of operation phase: USD 339,909 /year

2.7

Watershed Management

Watershed management requires a set of measures for the development and reform of
forestry and agriculture as well as the environmental protection and monitoring within
the YHPP project area. These costs would be realized during the construction phase
(1993-2000) and the first 10 years of YHPP operation phase (2001- 2010) (Mekong
Secretariat and Ministry of Energy 1992 Vol. IV). These estimated costs are as follows:
a.

During the construction phase (1993-2000): USD 45,455/8year
or USD 5,688/year.

b.

During the operation phase (2001-2010):

USD 84,500/10 year
or USD 8,450/year.

c.

Additional replanting (1993-1997):

USD 1,111/year.

2.8

Fauna

The protection of indigenous fauna within the YHPP catchment area is considered as an
important part of the watershed management. For the project area, it is necessary to

create and preserve the reservoir shoreline wetland vegetation (i.e. the semi impounded vegetation belt) for protecting the reservoir's shore, which are shelters for
indigenous fauna.
The total fauna protection-related cost is estimated at USD 300,000, allocated
principally for the construction phase of 8 years from 1993 to 2000 (USD 37,500 per
annum).

2.9

Water Quality, Aquatic Life and Fisheries

Due to the small storage and short retention time of the Sesan River water within the
YHPP reservoir, there is little danger of oxygen depletion and negligible negative
8


effects on the quality of out-flowing water. At the same time, the change from running
river water with low nutrient content to stagnant reservoir water may slightly increase
the number of fish species and other fauna.
Environmental costs are preventive expenditures for monitoring and managing the
water quality through additional instruments to analyze its temperature, pH, oxygen
content etc. and for developing new fishing systems after reservoir filling. This sum in
2001 is allocated as listed below:
a)

Additional instruments for analyzing water quality

USD 3,000

b)

Development of new reservoir fishing infrastructure

USD 7,600
––––––––––

Total:

2.10

USD10,600

Reservoir-induced Seismicity

The environmental costs relating to reservoir-induced seismicity are the preventive
expenditures for investigating and monitoring the reservoir-induced seismic hazards at
the dam site. The costs of an up to date micro-seismic network recommended for YHPP
are estimated at USD 64,890 disbursed over 5 years (1993-1997), i.e. USD 12,978 per
annum.

2.11

Public Health and Water-borne Diseases

In general, due to the change from running river water to stagnant reservoir water and
the considerable resettlement by forming the YHPP reservoir, there is the possibility of
mass development of disease vectors and the increasing exposure of the local
population to these vectors. These can lead to diseases like malaria, diarrhea, dysentery
and intestinal parasitic diseases.
Preventive and curative health care for affected local population consist of the following
items:

1.

Building of four new village health stations

USD 24,000

2.

Renovation of eight existing health centers

USD 77,334
––––––––––––––

Total public health - related new investment costs

USD 101,334

This cost is disbursed during the YHPP construction phase from 1993 to 2000, i.e. the
public health - related annual new investment cost is USD 12,677/year.
3.

Running of 12 preventive medicine programs

USD 1,982,667/year
9


4.

Realizing the popular health education program

USD 662,800/year
––––––––––––––

Total operation and management costs of these programs

USD 2,645,467/year

This total operation and management costs is allocated for the first 10 years of the
YHPP operation phase, i.e. from 2001 to 2010.
(References for Section 2.1 to 2.11: Mekong Secretariat and Ministry of Energy 1992;
Vol. II, IV and V).

2.12

Compensation and Resettlement

The total relocated population consists of 1,149 households with 5,384 inhabitants
living in 846 houses in 26 villages, amongst which are 10 fully flooded villages and 16
partially flooded ones. The public infrastructures affected by YHPP reservoir are: 6.8
km of provincial road; 25.6 km of rural road; four small bridges; five culverts; 6.8 km
of telephone lines and several houses, schools, crèches, health care stations, shops and
offices of people's committees. The agricultural area affected by reservoir flooding is
1,933 ha. These are planted with rice, auxiliary crops and perennial trees.
There are two alternatives for the estimation of compensation and resettlement- related
costs:
Alternative 1. This is purely based on the compensation cost only, which is defined
according to the Decree No. 90/CP of the Government. The relocated households and
local authorities of flooded communes could use these compensation payments to build
themselves new housing in the resettlement area. Using this alternative, the

compensation and resettlement - related costs consist of the following items:
A.

Resettlement expenditures used to compensate for property losses only
USD 16,132,243

B.

Clearing of trees in reservoir bed

USD 992,734

C.

Cost of afforestation

USD 445,332
–––––––––––––––

Total (A + B + C)

USD 17,570,309

Alternative 2. This adds the costs of building infrastructure in the new resettlement
areas:
10


Resettlement expenditures not only to compensate for property losses but also for
building new complete resettlement areas

USD 26,373,339
B.

Clearing of trees in reservoir bed

USD 992,734

C.

Cost of afforestation

USD 445,332
–––––––––––––––

Total (A + B + C)

USD 27,811,405

Alternative 2 has been selected as the preferred one although its costs are greater
because resettlement would be more thorough. (It would include construction of
infrastructure like the irrigation, and allow compensation for disruption and loss of
intangible assets.)
The compensation and resettlement-related costs of USD 27,811,405 are assumed to be
allocated for the period from 1993 to 1997 (USD 5,562,281 per annum).
(References for Section 2.12: PIDC 1 1994; People’s Committee of Kontum Province
1994).

2.13

Other Effects

In addition, four other effects were investigated. They were found to be of negligible
magnitude. These are vegetation, groundwater, mineral and radioactive deposits, and
archeological/recreational sites.

2.14

Results

The major environmental costs of Yali Hydropower Plant are summarized and
discounted with standardized discount rates of 8%, 10% and 12% for the whole plant
lifespan from 1993 to 2040. These values are presented in Table 3 below and analyzed
in section 3.0 (Net Present Value and Electricity Price With and Without Environmental
Costs).

11


Table 1.

Environmental Costs of Yali Hydropower Plant
Standardized Discount Rate
8%

Environmental
Factor

No.

10%

12%

Discounted
Discounted
Discounted
Environ- Percentage Environ- Percentage Environ- Percentage
mental Cost
in total
mental Cost
in total
mental Cost
in total
USD
USD
USD

1

Meteorology

1,852

-

1,818

-

1,786

2

Hydrology

3

Water Supply

4

Erosion
and
Sedimentation

5

Land Use

1,145,151

1.6

827,177

1.5

617,524

1.3

6

Forestry

15,814,862

21.5

12,933,116

21.8

10,889,128

22.1

7

Watershed
Management

8

Fauna

9

Water Quality

10

Reservoir-induced
Seismicity

11

Public Health

17,116,222

23.3

12,136,208

20.4

8,871,073

17.9

12

Compensation and
Resettlement

22,208,617

30.3

21,085,461

35.5

20,050,807

40.4

Total

73,619,087

100.0

59,396,137

100.0

49,608,465

100.0

283,846

0.3

269,491

0.5

256,267

0.5

16,705,411

22.7

11,829,276

19.9

8,633,456

17.4

6,422

-

4,562

-

3,330

-.

55,276

-

48,200

-

215,499

0.3

200,060

0.4

186,287

0.4

5,303

-.

4,495

-

3,822

-.

51,817

-

49,197

-

46,783

-

NET PRESENT VALUE AND ELECTRICITY PRICE WITH AND
WITHOUT ENVIRONMENTAL COSTS

The NPV and the electricity price (p) are the two most important financial criteria that
are used for estimating the financial viability of electric power plants in Vietnam. For
YHPP, these criteria are considerably influenced by incorporating the environmental
costs into the direct costs of the plant to determine its full costs.
In this section, the NPV and p are calculated on the basis of formulae presented in
Section 1 for the following cases:
Original case: without incorporating the YHPP environmental costs into the costs of the
plant; its electricity price is kept at the original level p of 5.2 US cents /kWh.

12

-

64,085

The largest single item is compensation and resettlement, which accounts for about onethird of environmental costs. Effects on forestry, water supply and public health are also
significant, each accounting for about one-fifth of the costs. Together, these account for
over 97% of YHPP’s environmental costs.

3.0

-


This is the original case of the YHPP original financial appraisal with its direct cost based net present value NPVd and electricity price p (See formulae presented in Section
1.3).
2.
Case 1: with incorporating the YHPP environmental costs into the direct costs of
the plant but maintaining the electricity price at the original level p of 5.2 US
cents/kWh. In this case, the YHPP’s net present value and thus its financial viability is
decreased.
3.
Case 2: with incorporating the YHPP environmental costs into the direct costs of
the plant while increasing the electricity price of the plant so that its net present value,
that is, its financial viability is kept unchanged at the original level of NPVd (See
formulae presented in Section 1.3).
Table 2.

Effects of Incorporating Environmental Costs on YHPP’s Net Present Value
and Electricity Price

Case

Original

1

2

Assumptions of - Without incorporated With
incorporated
With incorporated environmental YHPP
environmental YHPP
environmental
calculations YHPP
costs.
costs;
costs;
- Direct cost - based - Direct cost - based - Full cost
electricity price (original) electricity price (original) electricity
of 5.2 US cents/kWh.
of 5.2 US cents/kWh.
(increased)

–

based
price

- Original net present - Decreased net present - Original net present
value (NPVd).
value (NPVf).
value (NPVd).
NPV (USD)

NPVd = 219,520,140

NPVf = 160,124,000

NPVd = 219,520,140

p (US
cents/kWh)

p = 5.20

p = 5.20

p' = 5.68

Note: Using the standardized discount rate of 10%. See Appendix 2.

In the YHPP’s original financial appraisal, the environmental costs of the plant were not
considered or incorporated into its costs. This means that the net present value NPVd =
USD 219,520,140 and the electricity price p = 5.2 US cents/kWh mentioned in this
financial appraisal are only the direct cost - based ones.
If environmental costs of the plant are incorporated while its electricity price is kept
unchanged at the original value of p = 5.2 US cents/ kWh, the net present value is
decreased to NPVf = USD 160,124,000.
If the net present value of the plant is maintained at NPVd = USD 219,520,140 while its
environmental costs are incorporated, the electricity price needs to be increased to p’ =
5.68 US cents.

13

4.0

POLICY RECOMMENDATIONS

In the past, the government of Vietnam had heavily subsidized electricity production. In
recent years, it has declared its intention to eliminate these subsidies partially because of
the burden they imposed on the treasury. It is also believed that subsidizing electricity
consumption encourages excessive use and thus increases the environmental damages
that result from power generation.
As a result of this policy change, electricity prices were increased three times between
1986 and 2000 until they reached the current level. For YHPP, this is 5.2 US
cents/kWh. In spite of these increases, subsidization still occurs.
This study recommends that electricity pricing should be revised, not only to eliminate
direct government subsidies, but also to incorporate the environmental costs of
electricity production. Current pricing policies do not achieve this. Environmental costs
may not be explicitly recognized, but they are still paid. They come in the form of
damages to health and ecosystems, or relocation of affected people, and are most often
paid by vulnerable groups and future generations.
Incorporating these costs in the price of electricity would have several advantages.
These are:
a.
It would make environmental costs more visible, and thus more pressure will be
exerted to minimize them.
b.
It would implement the widely accepted principle of “polluter pays”, making it
possible to assign the payment of environmental costs to the activities that generate
these costs.
c.
If applied to all forms of power generation, it would provide appropriate

incentives for the generation of environmentally-friendly energy sources.
d.
It would provide incentives to reduce energy consumption through demand-side
measures, such as reducing transmission losses, adopting energy saving technologies,
shifting to less-energy intensive industries, and so on.
e.
It would provide revenue with which the environmental mitigation and
compensation activities associated with power generation could actually be undertaken.
This study therefore recommends that full-cost electricity pricing – incorporating
environmental costs – be applied to all forms of energy generation in Vietnam. Studies
would be required for each energy source in order to assess their environmental costs.
One such study has already been done for coal-fired electricity in Vietnam (Song and
Hanh 2001) and similar studies exist for coal-fired electricity in other countries (Zhang
and Duan 1999). Such studies generally show that full-cost pricing would result in
modest increases and would be affordable to all but the most energy-intensive and
energy-wasting activities.
In the case of YHPP, the price increase recommended is from 5.2 to 5.68 US cents/kWh
– a 10% increase. This is not an exorbitant amount. Furthermore, it should be
emphasized that these costs are already being paid through losses of forest benefits,
damages to public health, disruption to the lives of people relocated because of dam
14


construction and so on. Full cost electricity production simply reallocates these costs
according to the ‘polluter pays’ principle. In doing so, it makes the costs visible and
creates incentives to reduce them.
We therefore make the following specific recommendations:
a.
full-cost pricing should be applied to all forms of electricity generation in
Vietnam;

b.
revenue from the additional changes for environmental costs should be put into a
fund that would be used to pay for the prevention, mitigation and compensation costs
accordingly;
c.
in the case of Yali Hydropower Plant, the electricity price should be increased
from 5.2 to 5.68 US cents/kWh.
We believe these policy changes would help put Vietnam’s power sector on a path that
is economically and environmentally sustainable.

15


REFERENCES
Bann, C. 1998. The Economic Valuation of Tropical Forest. Land Use Option: A
Manual for Researchers. Page 117 – 126. EEPSEA. Singapore.
Francisco, H. and D. Glover. 1999. Economy and Environment. Case Studies in
Vietnam. Page 167 – 170. EEPSEA. Singapore.
Institute of Energy 1998. Vietnam Electricity Development Master Plan for the Period
2000 – 2010 in Perspective up to the Horizon 2020. Hanoi, Vietnam.
Mekong Secretariat and Ministry of Energy 1992. Environmental and Financing Studies
on the Yali Falls Hydropower Project (Basin Wide) – Draft Final Report.
Hanoi, Vietnam. Vol. I, II, III, IV, V.
People’s Committee of Kontum Province 1994. Investment Project for Socio –economic
Development of Resettled Villages within Yali Hydropower Reservoir Area.
Project Paper, Kontum, Vietnam.
PIDC 1 (Power Investigation and Design Company No 1). 1994. Environmental Impact
Assessment for Yali Falls Hydropower Project. Chapter 7. Compensation and
Resettlement. Investigation Report. Hanoi, Vietnam.
Song, N.V. and N. V. Hanh. 2001. Electricity Pricing for North Vietnam. EEPSEA.

Research Report No 2001 – RR 10. Singapore.
Zhang, S. and Y. Duan. 1999. Marginal Cost Pricing for Coal Fired Electricity in
Coastal Cities of China: The Case of Mawan Electricity Plant in Shenzen,
Guangdong Province. EEPSEA. Research Report Series. Singapore.

16


APPENDICES
Appendix 1.

YHPP Environmental Costs by Years and by Environmental Factors

Fauna

Reservoirinduced
Seismicity

Public
Health

Resettlement &
Compensation

Total
Environmental
Costs

10

11

No.

Hydrology

Water
Supply

Land Use

Forestry

Water
shed
Management

1

2

3

4

5

6

7

8

9

1993

71,091

–

12,866

1,290,133

5,821

37,500

12,978

12,667

5,562,286 7,006,217

1994

71,091

–

12,866

1,290,133

5,821

37,500

12,978

12,667

5,562,286 7,006,217

1995

71,091

–

12,866

1,290,133

5,821

37,500

12,978

12,667

5,562,286 7,006,217

1996

71,091

–

12,866

1,290,133

5,821

37,500

12,978

12,667

5,562,286 7,006,217

1997

71,091

–

12,866

1,290,133

5,821

37,500

12,978

12,667

5,562,286 7,006,217

1998

–

–

12,866

1,290,133

5,821

37,500

–

12,667

–

1,358,751

1999

–

–

12,866

1,290,133

5,821

37,500

–

12,667

–

1,358,751

2000

–

–

12,866

1,290,133

5,821

37,500

–

12,667

–

1,358,751

2001

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2002

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2003

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2004

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2005

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2006

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2007

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2008

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2009

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2010

–

2,593,000 166,273

1,452,318

8,450

–

–

2,645,467

–

6,865,508

2011

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2012

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2013

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2014

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2015

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2016

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2017

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2018

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2019

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2020

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2021

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2022

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2023

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

17


Appendix 1. (Continued)

1

2

2024

–

2025

3

4

5

6

7

8

9

10

11

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2026

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2027

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2028

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2029

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2030

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2031

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2032

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2033

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2034

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2035

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2036

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2037

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2038

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2039

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

2040

–

2,593,000 166,273

1,113,109

–

–

–

2,645,467

–

6,517,849

Note: The YHPP environmental costs by environmental factors of meteorology, erosion and
sedimentation, vegetation, water quality and aquatic life, ground water and mineral radioactive deposits
are not considered in Appendix 2 because of their negligible values.

18


APPENDIX 2.
Net Present Value (NPV) for Two Assumptions: With and Without Incorporating the
Environmental Costs of the Plant into Its Direct Costs
(i.e. the Direct Cost - based NPVd and Full Cost - based NPVf at original formal
electricity price of 5.2 US cents/kWh).
Input Data of Appendix 2
Energy sale per annum:

2,728.4 GWh

Electricity price formally determined by the electricity sector:

5.2 US cents/kWh

Revenue obtained by electricity sale per annum:

USD 141,876,000

Total investment capital cost:

USD 614,775,000

O & M Costs in percentage of the initial investment capital cost:

0.8%

Common standardized discount rate:

10%

Calculation Table of Appendix 2
Cost - Revenue Balancing for Two Assumptions: With and Without Incorporating the
YHPP Environmental Costs into Its Direct Costs.
Unit: USD per annum.
YHPP Direct Cost
Year

Investment
Cost

O&M
Cost

Total Direct
Cost

(4)=(2)+(3)

YHPP
Environmental Cost
(See App. 2)

1

2

3

4

5

YHPP Full
Cost
(6)=(4)+(5)

YHPP
revenue by
Energy Sale

6

7

Cost-Revenue Balancing
Direct Cost Full Cost based (8)=(7)- based (9)=(7)(4)

(6)
8

9

1993

28,026,000

–

28,026,000

7,006,217

35,032,217

–

-28,026,000

-35,032,217

1994

57,962,000

–

57,962,000

7,006,217

64,968,217

–

-57,962,000

-64,968,217

1995

120,495,000

–

120,495,000

7,006,217

127,501,220

–

-120,495,000

-127,301,220

1996

99,803,000

–

99,803,000

7,006,217

106,809,220

–

-99,803,000

-106,809,220

1997

113,408,000

–

113,408,000

7,006,217

120,414,220

–

-113,408,000

-120,414,220

1998

88,317,000

–

88,317,000

1,358,751

89,675,751

–

-88,317,000

-89,675,751

1999

67,071,000

–

67,071,000

1,358,751

68,429,751

–

-67,071,000

-68,429,751

2000

39,694,00

–

39,694,00

1,358,751

41,052,751

–

-39,694,00

-41,052,751

2001

–

4,918,000

4,918,000

6,865,508

11,783,508

141,876,000

136,958,000

130,092,490

2002

–

4,918,000

4,918,000

6,865,508

11,783,508

141,876,000

136,958,000

130,092,490

2003

–

4,918,000

4,918,000

6,865,508

11,783,508

141,876,000

136,958,000

130,092,490

2004

–

4,918,000

4,918,000

6,865,508

11,783,508

141,876,000

136,958,000

130,092,490

2005

–

4,918,000

4,918,000

6,865,508

11,783,508

141,876,000

136,958,000

130,092,490

2006

–

4,918,000

4,918,000

6,865,508

11,783,508

141,876,000

136,958,000

130,092,490

19